Exercise 5-15 Operating Leverage [LO5-4, LO5-8]

Magic Realm, Inc., has developed a new fantasy board game. The company sold 30,000 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $500,000 per year, and variable expenses are $42 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor.

Required:

1-a.

Prepare a contribution format income statement for the game last year.

Magic Realm, Inc.,
Contribution Income Statement
	Total	Per Unit

+

1-b.

Compute the degree of operating leverage

Degree of operating leverage

+

2.	Management is confident that the company can sell 36,300 games next year (an increase of 6,300 games, or 21%, over last year).

a.

Compute the expected percentage increase in net operating income for next year.

Net operating income increases by

%

+

b.

Compute the expected total dollar net operating income for next year. (Do not prepare an income statement; use the degree of operating leverage to compute your answer.)

Total expected net operating income

+